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Thursday, 12 June 2008

Favourable rating for Malaysia toll-road Sukuk

RAM Ratings has assigned respective ratings of AA3 and A2 to MRCB Southern Link Berhad's proposed $258 million secured senior Sukuk and $60 million junior Sukuk; both long-term ratings have a stable outlook.

The company is a wholly-owned subsidiary of MRCB Lingkaran Selatan Sdn Bhd (MRCB), the concessionaire for the proposed Eastern Dispersal Link Expressway (EDL) in Johor Baru, Malaysia. MRCB Southern Link will raise funds via the Sukuk and a syndicated transferable term loan of up to $67 million for the development of the toll-road project.

Financial commitments on the Sukuk and the term loan will be supported by back-to-back payments from the concessionaire once tolling operations commence; the security package ensures that the Sukuk holders have full and direct recourse to the concessionaire. In this regard, RAM Ratings recognises the strong credit linkage between the issuer and the concession company; as such, it views both companies in tandem from a credit standpoint. The ratings, therefore, reflect the project economics of the EDL.

Meanwhile, the two-notch rating difference between the senior Sukuk and the junior Sukuk is attributable to the strong equity-like features of the latter, which strengthen the credit position of the senior Sukuk holders. These characteristics include subordination in terms of payment obligations as well as security, and the inability of the junior Sukuk holders to declare an event of default ahead of the senior Sukuk holders and term loan lenders, so long as the senior Sukuk and the term loan remain outstanding.

The rating of the junior Sukuk is also supported by the expected debt-coverage levels exhibited by the instrument under a stressed-case scenario. The covenants restricting such junior payment obligations offer additional protection to the senior Sukuk holders.

The ratings reflect favourable project economics, given the unique tolling concept of the EDL, toll charges will be imposed on all vehicles, except motorcycles, entering and exiting Malaysia via the Johor-Singapore Causeway. Demand risk is thus negated to a large extent by the availability of actual cross-channel traffic volumes as a yardstick for future performance; traffic on the causeway increased at a compounded annual rate of 4.6 per cent between 1991 and 2005. The strategic importance of the causeway lends further credence to the sustainability of its traffic growth in the future, RAM said.

The ratings are also supported by the strong cash-generating ability of the concession asset. Based on a stressed-case scenario, RAM Ratings expects the project to be able to generate minimum and average senior finance service cover ratios of 1.19 times and 1.37 times, without cash balances, respectively, throughout the tenure of the senior financing programme.